In what it calls a compromise solution, the government has chosen a "hybrid" option from the three it was considering.

The rail line will be cut at Wickham and light rail will travel along the existing corridor until it reaches Worth Place at Union St, where it will deviate to Hunter St and Scott St through to Pacific Park.

"We did a lot of consultation and this is what the community, overall, said that they wanted," she says.

"In the end, the calculations were that this option would bring us the best chance of revitalising the city."

The Minister says the option of taking light rail through the Hunter St Mall would have compromised any future plans for widening footpaths and more outdoor dining in that area.

She says work will begin soon on a temporary station near Wickham, the heavy rail line will be cut, then work will start on the light-rail service.

The chosen option is cheaper than the mall option but more expensive than using the existing rail corridor, and is expected to cost more than $400million.

Member for Newcastle, Tim Owen, says it took a lot of effort to get the government to look closely at the light-rail proposal for Newcastle.

"It's about turning Newcastle into one of the greatest coastal cities in the South Pacific region," he says.

"I'm very, very happy and very, very pleased that we've made the decision.

"The money is in the bank and we're ready to go, basically."

He says the chosen option is "probably the best compromise".

But not everyone is as delighted as Mr Owen with the outcome.

The Greens and commuters plan to hold a rally outside Parliament House in Sydney next week, demanding heavy rail be retained in Newcastle.

ABC Newcastle's Facebook page has been flooded with comments on the decision, many from commuters living in areas such as Maitland and Lake Macquarie who say it will be too difficult to swap from a train to a tram, especially for those with bikes or prams.

While some comments welcome the decision finally being made, and a solution to traffic snarls at the Wickham railway gates, others criticise the plan as a waste of money and say developers have had their way.

Ed Crawford, chairman of the Property Council in the Hunter, denies the claim and says developing the heavy rail land that will be left vacant is "not on anyone's radar" at present.

"Overall it's a benefit for everybody, and I don't think this is in any way a free kick or a handover of land to developers or anyone else," he says.

"I think it's just a win for the city."

But Alan Squire, from Newcastle Transport for Business Development, calls the decision a fraud on the community.

He doesn't believe the light-rail service will even eventuate, and says his group's option to use the existing rail corridor for light rail was not even considered, even though it would cost less than half the route chosen.

"Why on earth would you shift a railway line 20 or 30 metres?" he asks.

Mr Squire says as well as being wastefully expensive, the chosen option will disrupt businesses in Hunter St and increase travel times from Maitland and Lake Macquarie.